Substance Act – Changes Regarding Private Funds and Exempted Funds
The Substance Act, which became operative on 31 December 2018, amends the Funds Act in order to bring the regulatory regime of Bermuda’s investment fund industry in line with international standards and create consistency with other regulatory regimes in Bermuda.
The Funds Act is amended in the following ways:
Reference to Excluded Funds in relation to Private Funds (i.e. funds for fewer than 20 investors) has been removed meaning that the term Excluded Funds can no longer be used interchangeably with that of Private Funds.
Exempted Funds will now be known as Professional Funds. Exempted Funds included Class A Exempt Funds and Class B Exempt Funds which will now be known as Professional Class A Funds and Professional Class B Funds.
Professional Funds and Private Funds will collectively be known as Registered Funds.
The current self-certification process (for Class A Exempt Funds), procedure for exemption (for Class B Exempt Funds) and notification process (for Private Funds) is no longer be available. Registered Funds will now need to apply to the Bermuda Monetary Authority (BMA) for registration and approval before commencing trading.
Private funds will need to appoint a local service provider authorised and regulated by the Bermuda Monetary Authority. The Funds Act amended the definition of “service provider” to expand it to include corporate services providers; as such, most funds will meet the local service provider requirement through the engagement of a Bermuda corporate services provider.
In addition, Private Funds are now required to appoint a custodian to ensure safekeeping of the fund’s assets. The BMA may waive the requirement to appoint a custodian if it meets certain requirements set by the BMA. The operators of a Private Fund must also certify annually that it satisfies the qualifying criteria and the requirements for registration and will continue to satisfy them on an ongoing basis. The operators must also file annually information on the net asset value and its underlying assets, a copy of the fund’s management accounts or audited financial statements and information on any material changes that took place during the course of the year.
Funds seeking to register as one of the Professional Funds will need to either meet the existing requirements of section 6A or 7 of the IFA 2006 respectively in order to be designated as either a Professional Class A Fund or a Professional Class B Fund.
The BMA will have greater powers of supervision and enforcement over Registered Funds and the power to make rules for Registered Funds concerning investor disclosures and related matters in the same way as it has for authorised funds under the Fund Prospectus Rules 2007.
Funds which are currently excluded or exempt from authorisation will have a transition period of six months to comply with any new requirements. Clients with existing funds are encouraged to reach out to your usual Appleby contact to address any questions that you may have regarding the transition process.
Funds Amendment Act – Waiver of Custodians – Class A Exempt Funds/Professional Class A Funds
The Funds Amendment Act received Royal Assent on 31 December 2018 and it is anticipated that it will become operative in the first quarter of 2019.
The Funds Amendment Act amends the Funds Act and once operative, will allow Professional Class A Funds (previously Class A Exempt Funds) to apply for exemption from the requirement to appoint a custodian or a prime broker where it meets the criteria as the BMA may determine and has published on its website.
It is anticipated that this waiver will be useful for ILS funds that invest directly in an underlying reinsurance company regulated by the BMA where such funds are held in trust at the reinsurance level. This is likely to see additional use of Professional Class A Funds in ILS fund structures.
If you have any questions on the above, or any other questions that are not covered by this News Alert, please speak to your usual Appleby partner or a member of the team below.